Rio Tinto diamond bet adds sparkle to junior miners' prospects

North Arrow Minerals

03/12/2014 17:37

By Susan Taylor 
    TORONTO, Dec 3 (Reuters) - Rio Tinto Plc's  RIO.L  
re-commitment to diamonds with a $350 million Canadian mine 
expansion has highlighted the prospects for a handful of smaller 
players boasting one of the sector's rarest commodities - new 
mines. 
    After two decades without a big discovery, the $18 billion 
diamond mining industry will need fresh resources to feed a 
growing consumer appetite for the elusive stone, industry 
forecasters predict. 
    They say demand has been boosted by marketing aimed at 
convincing couples in China and India that diamonds are forever 
and single women to treat themselves to a right-hand ring.  
    Global consumer demand for diamond jewelry is forecast to 
grow at 4 to 5 percent annually, to $31 billion in 2018 from $25 
billion last year, Anglo American Plc-owned  AAL.L  De Beers 
said in a presentation last month. 
    De Beers, the world's biggest diamond producer by market 
value, has also said it expects global supply to decline after 
2020, with demand outstripping supply in the next 10 years. 
    BMO Research forecasts rough diamond prices will increase 
5-7 percent annually from 2015 through 2017, helped by solid 
retail sales. 
    That outlook contrasts with sinking prices for commodities 
ranging from oil to iron ore, which have forced natural resource 
companies to scale back production and exploration. 
    Only a few new diamond mines are due to open in coming 
years, including junior-backed developments in Canada and 
Firestone Diamonds Plc's  FDI.L  Liqhobong mine in Lesotho. 
Russian state miner Alrosa also plans a handful of new 
operations. 
    Stornoway Diamond Corp  SWY.TO , which is building Quebec's 
first diamond mine, was worth just C$120 million ($105.21 
million) in April when it secured nearly C$950 million in 
financing. 
    The mine, which starts commercial production in 2017, is 
expected to produce 1.6 million carats annually. 
    "We were the litmus test for whether or not the diamond 
supply and demand thesis ... was a good investment," said Chief 
Executive Matt Manson. 
    It will cost C$690 million to build the mine, but the 
Montreal-based junior had to "finance for sins of the past," 
such as industry-common cost overruns, Manson said.  
    Last month, Anglo-Australian diversified miner Rio said an 
expansion at its Diavik mine in Canada's Northwest Territories, 
jointly owned with Dominion Diamond Corp  DDC.TO , will bring 
fresh production online in 2018.  ID:nL3N0TH03Q   
    Rio's decision may foster support for juniors and help spark 
merger and acquisition activity among mid-tier players, said 
Dundee Capital Markets analyst Matthew O'Keefe. 
    Patrick Evans, chief executive of both Mountain Province 
Diamonds Inc  MPV.TO  and Kennady Diamonds Inc  KDI.V , says 
small explorers may not necessarily end up as takeover targets. 
    Mountain Province sold De Beers a 51 percent stake in 
Canada's Gahcho Kue project. It is expected to be the world's 
largest new diamond mine when it comes online in 2017, producing 
some 5 million carats annually. 
    Evans is determined that Kennady "go it alone" with any 
discovery it makes on its land alongside Gahcho Kue.  
    "The juniors make the discoveries and the majors then try to 
swoop in. They caught us unawares last time round," he said. 
    "That won't happen again ... We have the knowledge, we have 
the skills and importantly, we have the financial resources to 
be able to build Kennady Diamond as an independent diamond 
mine." 
     
    HARD AS DIAMONDS  
    To be sure, the industry's prospects are not entirely 
sparkling. Raising capital remains challenging, particularly for 
juniors. It took Stornoway two years to finalize its funding. 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
    Graphic: The long odds of discovery 
    http://link.reuters.com/fer53w     
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>   
    In the last 140 years, geologists sampled nearly 7,000 
kimberlite pipes, the distinctive volcanic rock formed hundreds 
of miles below ground that transports diamonds to the earth's 
surface. 
    Of those pipes, just 60 had enough diamonds to make mining 
economical and only seven were 'Tier 1' deposits, with more than 
$20 billion in reserves. 
    As the hunt for diamonds grows increasingly remote, complex, 
and costly, some have pulled out. BHP Billiton Plc  BLT.L , the 
world's largest miner, exited the sector in 2012. 
    "Diamond deposits are very hard to find and you've got to 
spend an awful lot of money to get to even the starting line," 
said BMO Capital Markets analyst Edward Sterck. 
    "But humans are magpies. We like nice, shiny things and it's 
got a certain allure. So people keep on trying to succeed." 
    ($1 = 1.1406 Canadian dollars) 
 
 (Editing by Jeffrey Hodgson and Marguerita Choy) 
 ((susan.taylor1@thomsonreuters.com; +1 416 941 8083; Reuters 
Messaging: susan.taylor1.thomsonreuters.com@reuters.net)) 
 
Keywords: MINING DIAMONDS/